by T. GormanPosted on Posted in SECActions

The SEC filed its first action involving a private equity fund and broken deal expenses. By the time the Commission discovered the question the firm realized it did not have a disclosure policy, retained a consultant to study the issue and adopted a policy. Nevertheless, to settle the proceeding the firm was required to pay disgorgement and a $10 million penalty. In the Matter of Kohlberg Kravis Robert & Co. L.P.¸Adm. Proc. File No. 3-16656 (June 29, 2015).

Respondent KKR is a private equity firm specializing in buyout and other transactions. For its Flagship PE Funds and other advisory clients the firm advises and sources potential investments. The firm also provides investment management and administrative services to its private equity funds for a management fee. In addition, the firm raises capital from co-investors for its private equity transactions.

KKR incurs significant investment expenses sourcing investment opportunities. The firm is reimbursed directly from portfolio companies for expenses incurred with successful transactions. For broken deal expenses it is reimbursed through fee sharing arrangements with its funds. Consistent with the applicable limited partnership agreements, and those for the Flagship 2006 Fund LPA, KKR shared a portion of its monitoring, transaction and break-up fess with the 2006 Fund. Under the fee sharing arrangement KKR received 20% of the fees and economically bore 20% of the broken deal expenses. However, the 2006 Fund’s LPA and offering materials did not include any express disclosure that KKR did not allocate broken deal expenses to its co-investors despite the fact that they participated in, and benefited from, KKR’s general sourcing transactions.

From 2006 through 2011 KKR allocated broken deal expenses by geographic region where the potential deal was sourced. Thus it allocated broken deal expenses related to potential North American investments to the 2006 Fund. Before 2011 however the firm did not allocate or attribute any of those expenses to co-investors.

In June 2011 KKR concluded that it lacked a written policy governing its broken deal expenses. Over the next few months a policy was drafted, memorializing its allocation methodology. At the same time the firm decided to make an allocation of broken deal expenses to co-investment vehicles.

In late October 2011 KKR engaged a third party consultant to review the its fund expense allocation practice. Effective January 1, 2012 the firm revised its broken deal expense allocation methodology following the consultant’s review. A new methodology was implemented which allocated part of the expenses to partner vehicles and other co-investors.

In 2013 OCIE conducted a compliance exam which included a review of expense allocations. During the examination KKR refunded its Flagship PE Funds a total of $3.26 million in certain broken deal expenses that had been allocated to them from 2009 to 2011.

Prior to the institution of the new policy KKR did not allocate any share of broken deal expenses to its co-investors, with certain exceptions. Likewise, the firm did not expressly disclose in the LPAs or related materials that it did not allocate or attribute broken deal expenses to co-investors. As a result KKR misallocated $17.4 million in broken deal expenses between its Flagship PE Funds and co-investors, thereby breaching its fiduciary duty as an investment adviser, according to the Order. The Order alleges violations of Advisers Act Sections 206(2) and 206(4)-7.

Respondent resolved the matter, consenting to the entry of a cease and desist order based on the Sections cited in the Order. In addition, they agreed to pay disgorgement of $14,165,968 (net broken deal expenses), prejudgment interest and a penalty of $10 million.

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by T. GormanPosted on Posted in SECActions

Jing Wang, a former Qualcomm Inc. Executive Vice President began by constructing a cover-up. Then he engaged in insider trading, using inside information taken from his employer. The scheme failed. Mr. Wang has been sentenced to 18 months in prison and directed to pay a $500,000 fine after pleading guilty to securities fraud based on his insider trading, money laundering tied to his efforts to evade detection and admitted to obstruction. U.S. v. Wang, 3:13-cr-03487 (C.D. Calif. Filed Sept. 20, 2013).

Mr. Wang traded on inside information obtained from his employer in three instances. First, on March 1, 2010, after the close of the market, Qualcomm announced an increase in its dividend and a stock repurchase plan. Earlier, in February Mr. Wang became aware of these plans. On the morning of March 1, he attended a company board meeting where the plan was discussed. Later that day he instructed his friend and broker Gary Yin, a registered representative at Merrill Lynch, to use all of the funds in an account he controlled to purchase Qualcomm shares. Mr. Yin also purchased shares. After the announcement the share price increased and both men sold the securities at a profit.

Second, on January 5, 2011 Qualcomm announced the acquisition of Atheros Communications, Inc. Prior to the announcement Mr. Wang learned about the deal through the course of his duties. He also attended a board meeting where it was discussed. He purchased shares of Atheros as did Mr. Yin. After the announcement the share price increased and both men sold their shares at a profit.

Third, on January 26, 2011 Qualcomm announced increased guidance. During the prior month Mr. Wang became aware that the firm was considering announcing increased guidance. That information was confirmed at a December 6, 2010 board meeting Mr. Wang attended. The day before the announcement he telephoned Mr. Yin and instructed him to purchase company shares. After the announcement the share price increased. Mr. Wang sold all of his shares at a profit.

The cover-up traces to 2006 before the insider trading. In that time period Messrs. Wang and Yin created off-shore entities and set-up accounts. The ownership of the accounts was designed to make it appear that they belonged to others. The money laundering charge was based on the efforts of Mr. Wang to transfer over $525,000 from one of the offshore accounts that included about $250,000 from the insider trading to another nominee brokerage account in the British Virgin Islands. As part of the plea agreement Mr. Wang also admitted to fabricating evidence and a false cover story in conjunction with his brother Bing Wang and Mr. Yin. See also SEC v. Wang, Civil Action No. 3:13-cv-02270 (S.D. Cal. Filed Sept. 23, 2013)(Mr. Yin pleaded guilty to conspiring with Jing Wang and Bing Wang to obstruct justice and launder money).

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